The European Central Bank is likely to wait until September before announcing a shift away from its ultra-easy policy, while a move this month is seen as too close to call, a Reuters poll of economists showed. Improving economic growth in Europe and hints from ECB policymakers have helped shape expectations for a shift, probably in the form of an announcement that it will taper its asset purchases, even though the inflation outlook doesn't point to a need for a change.
German bund yields and the euro have pushed higher in recent weeks, a trend expected to extend over the coming year, according to a clutch of separate Reuters polls of fund managers, fixed-income strategists and currency analysts over the past few weeks. Euro zone economic growth is expected to remain strong but steady through to the end of 2018, the latest Reuters poll of over 75 economists showed. But analysts trimmed inflation expectations for this year slightly compared with a month ago.
The ECB's most likely course of action in September is to announce a tapering of its 60 billion euros of monthly asset purchases, probably starting in early 2018, according to the poll. "Our base case scenario is that they (the ECB) will not spell out the details in September, but they will really give a very clear hint that the tapering will come," said Carsten Brzeski, chief economist at ING.
"They are facing the same problem that so many other central banks are, namely, a cyclical upswing in growth without any inflationary pressure. The challenge for the ECB is also how to move towards tapering without creating a taper tantrum." A little over one-quarter of the economists polled said the ECB will not announce any change in September. A similar proportion of economists predict an extension to its quantitative easing programme beyond December, but with a reduction in the amount of monthly asset purchases.
"The balance on whether they will adjust their policy in September or October will be decided by their tone in July," said Claus Vistesen, economist at Pantheon. At the July meeting, only slightly more than half of the sample - 56 percent - said the ECB will not make any changes to its guidance on monetary policy.
Over a quarter of the respondents said the ECB will drop its QE easing bias with regard to size only and the remaining said the central bank will scale back its asset purchases programme in its entirety. The Wall Street Journal reported on Thursday that the ECB was likely to signal in September that its bond-buying scheme will be gradually wound down next year. ECB chief Mario Draghi could give the next clue on the plans in late August, it said.
The Reuters poll suggested the ECB is unlikely to raise interest rates until the fourth quarter of 2018. Then, the central bank is expected to take its deposit rate higher by 10 basis points from the current -0.4 percent. Medians showed gross domestic product would grow 0.4 percent each quarter from now until end-2018 in the euro zone, and at a similar pace in the biggest economies of the region - Germany and France.
However, inflation expectations remain weak. Euro zone inflation is expected to average 1.5 percent this year and next and is not expected to reach the ECB's target of just below 2 percent until at least 2020. Polling was conducted July 10-13, before a newspaper report based on ECB sources that suggested September was the most likely time for the ECB to signal it will wind down its 2.3 trillion euro asset purchase programme.
The shift in expectations come at a time when the ECB's peers are also veering away from the many years of ultra-loose policy that has prevailed since the financial crisis. On Tuesday, the Bank of Canada raised interest rates for the first time in seven years in a decision that was first thought to yield no move - by roughly the same percentage of economists - only for several to change their minds in the days beforehand.